Economic Crisis

When one’s day is fully revolving around the global financial crisis, it is very hard to ignore it. Early morning when I drive my car to work, I turn on NPR news to avoid all other crap that FM carries on air and the main focus is on you-know-what. Browse Internet – Crisis. Talk with friends – Job security. So it is justifiable to say that a sufficient amount of time in the day, I sense through several sources that it is a highly focused, discussed and debated topic.

So why is it that this needs so much attention right now and people all around the world need to worry about it? There are several reasons but the most fundamental of all is well-being. Since money determines the quality of life that all/most of us lead, when the system that churns out that key factor is screwed, the quality of life is screwed. Fair enough.

The economic system is complex and I don’t understand the details of the system’s jargon for the most part.  Several pages of information has crossed my eye trying to explain what caused the economic system to fail. But there are some articles that cut through the crap and bring out the essence.  What I am writing about is based on one such article that I chanced to read, by Barbara Kiviat of TIME magazine. Here’s the link .

The above cited article is good for the most part because it serves to highlight some very important fundamental aspects of human nature.

“In the short term, an era of risk aversion is sure to continue as financial outfits .. blah blah blah .. pull back on everything from the creation of complex securities to credit-card limits. But as the appetite for risk returns – and it always does – companies are promising long-lasting change”. The question to be asked is why will the appetite for risk return?

“Risk gets forgotten in all bubbles”. Why?

“In times like this, people do listen to risk managers. The problem is, times will become good again and then you listen to the trader who is making a big profit”. Great saying. Why?

“It requires human beings to ask the big-picture questions that computer models don’t, like, what would happen if the fundamental assumptions – house prices go up, institutions are too big to fail – prove to be wrong?”. It is clear that a crisis can be avoided if such questions are asked and they have historically never been. Why?

“The financial models that predict the return on an investment are inherently flawed because they preclude the possibility of an outsize event”. So yeah, it is humanly impossible to predict how the future will look like, yet there are several complex financial instruments out there doing exactly that. Why?

The answers to all the above questions are simple and true facts.

Humans are fundamentally selfish. I take care of my interests always, sometimes it could be even at the expense of someone else’s.  Either I don’t care or I cannot even see that as a possibility because I don’t know what future holds. That’s frank truth that many of us find very hard to comprehend.

Humans are fundamentally greedy. I always have an interest to go from a particular present state to a next state where I derive more happiness, and in almost all situations it comes as a result of the fact that I have enough money to afford it. One could see a point of the definition of happiness, which is highly individualistic and subjective. So yes, I acknowledge that my happiness is a variable that is derived through materialistic means. One could also look really farther ahead and ask the ultimate question – OK, so what is that final state where I am most happy and that is all there is and nothing more? Neither do I know what it is or how to reach it. But at least it seems logical to ask the questions of what/how since I know why. To the extent that I can see, materialistic goals and means seem to be an infinite loop and I am stuck. As I read back what I’ve just written, there are tons of places where I keep repeating the word “I” or “me” or something synonymous. The ultimate of the ultimate questions is what is this “I”, which seems to have taken a form of its own and is asking these ultimate questions? I don’t know is the best answer I am able to give for this, at present.

Humans are fundamentally stupid and ignorant. A famous relativity expert states: “Two things are infinite: the universe and human stupidity; and I’m not sure about the universe“. His remark seems to hold a lot of profound value when we think of answers to the above asked questions. We solve a problem just so that we can be greedy all over again!

The title of that TIME article reads “A new approach is emerging: human judgment”. What needs to be acknowledged is that it has been emerging for quite a long time and it remains flawed. As long as it remains that way, there’s really no way that one can see to prevent it. Well, not everything is so hazy. The author also goes on to cite some guys who are supposedly risk experts and who had a “vision”. Even then, this vision cannot extend to “long-term big questions asking” mentality simply because of the fundamental human limitation that the future is uncertain and the only thing that can be certainly said is that it will remain that way. So let’s simply ride along and see what’s in store.